Geoeconomics and the rise of de‑risking

Geoeconomics refers to the application of economic instruments—such as trade, investment, finance, and technology policy—to achieve strategic and security objectives. For the EU and Germany, the experience of Russia’s weaponisation of gas supplies and mounting concerns over Chinese economic coercion have pushed “economic security” and “de‑risking” to the centre of policy. The EU’s 2023 Economic Security Strategy explicitly identifies four risk areas—supply chains, critical infrastructure, technology security, and economic coercion—framing de‑risking as a way to reduce dangerous dependencies without embracing full decoupling.​

In this context, Berlin’s China Strategy, adopted in 2023, characterizes China as a “partner, competitor and systemic rival” and urges firms to avoid excessive dependencies, particularly in critical sectors and technologies. The aim is not to shut the door on China, which remains Germany’s largest single trading partner, but to rebalance exposure so that shocks—from sanctions to blockades or coercive trade measures—do not translate into systemic vulnerability.

Mittelstand: backbone under pressure

The Mittelstand – roughly 3.8 million small and medium-sized enterprises – accounts for over 99% of German firms and a large share of employment, innovation, and exports. Even though large corporations dominate headlines, SMEs generate about half of German export sales, with manufacturing‑oriented Mittelstand firms particularly embedded in global value chains. Europe remains their primary market, but Asia—especially China—has emerged as a major outlet: China alone accounts for about 14% of Mittelstand exports and around 7% of their imports, making it one of their top non‑European trade partners.​

These firms are often family‑owned, capital‑constrained, and heavily specialised in narrow market niches, which shapes their risk calculus. On the one hand, long investment horizons, conservative financing, and close customer relationships make them structurally risk‑averse. On the other hand, once they commit to a market like China, sunk costs in plants, distribution, and local partnerships create powerful incentives to stay, even as geopolitical risks rise. This tension lies at the heart of the Mittelstand de‑risking dilemma.​

The China exposure puzzle

Germany’s trade with China has grown by more than 900% since 2001 – from roughly 27 billion USD to around 273 billion USD in 2024 – with Germany accounting for about one‑third of total EU–China trade. For many Mittelstand firms, China is simultaneously a key sales market, an innovation hub, and a crucial production base, especially for components, machinery, and intermediate goods. Statistical monitoring shows that out of more than 14,300 eight‑digit product groups, a bit over 200 have a Chinese import share above 50%, and 77 of these have maintained such high shares for five consecutive years—indicating persistent dependencies in a relatively narrow but strategically sensitive set of inputs.​

Contrary to political rhetoric, there is so far little evidence of broad‑based de‑risking on the import side. Germany’s total imports from China have dipped slightly in value, but the number of product groups with potentially critical dependency and the average import share of China in those categories have actually risen marginally. In roughly 45 of the 77 persistent dependency product groups, China’s share increased further in 2024 compared to the 2020–2023 average, suggesting that for some niches, the opposite of de‑risking is occurring. For Mittelstand suppliers relying on highly specialised Chinese inputs, diversification is often costly or technically difficult, which blunts the impact of political exhortations to “spread risk.”​

On the export side, many German firms are moving towards an “in China, for China” model by deepening local manufacturing and R&D in China to serve the Chinese market while trying to insulate operations from geopolitical shocks. Rather than exiting, they are embedding themselves more deeply into Chinese ecosystems, reasoning that a strong local footprint is the best hedge against tariffs, sanctions, or supply disruptions. For the Mittelstand, this strategy can preserve market share but also increase asset and technology exposure to a state that Berlin now labels a systemic rival.​